Input Tax Credit under GST 

GST is set to revolutionize the world of Indian indirect taxation and Input Tax Credit is one of its key features which will help in eliminating cascading effect of taxes. GST is ca comprehensive tax levy on manufacturing, sale and consumption of goods and services at a national level. 

In simple words, Input Credit means at the time of paying tax on sales, you can reduce the tax you have already paid on purchases. 

When you buy a products/services from a registered dealer you pay tax on the purchase. On Selling you Collect the Tax. You adjust the taxes paid at the time of purchase with the amount of output Tax (Tax on Sales) & balance Liability of Tax (Tax on sales minus tax on purchase) has to be paid to the government. This mechanism is called Utilization of Input Tax Credit. 

For Example: ABC is a Manufacturing Company having: 

1. Tax payable on Output (Final Product) is Rs. 1000/- 
2. Tax Paid on input (purchases) is Rs. 500/- 
3. ABC Company can claim Input Credit & need to deposit Rs. 500/-in taxes. 

Key Terminologies of GST Law in connection with Input Tax Credit under GST are as follows: 

What is Input? 

Input means any goods other than capital goods used or intended to be used by a supplier in the course or furtherance of business. 

What is Input Service? 

This term denotes any service used or intended to be used by a supplier in the course of furtherance of business. 

What is Input Tax? 

Input tax in relation to a registered person, means the Central Tax, State Tax, Integrated Tax or Union territory tax charged on any supply of goods or services or both made to him & includes – 

1. the integrated goods and services tax charged on import of goods ; 
2. the tax payable under the provisions of sub sections (3) and (4) of section 9; 
3. the tax payable under the provisions of sub sections (3) and (4) of section 5 of the integrated goods and services tax; 

d) the tax payable under the provisions of sub sections (3) and (4) of section 9of the respective State goods and services Tax Act ;or 

e) the tax payable under the provisions of sub sections (3) and (4) of section 7of the Union Territory goods and services Tax Act, 

but does not include the tax paid under the composition levy. 

What is input tax credit?

Input tax credit means at the time of paying tax on output, you can reduce the tax you have already paid on inputs and pay the balance amount.

Here’s how:
When you buy a product/service from a registered dealer you pay taxes on the purchase. On selling, you collect the tax. You adjust the taxes paid at the time of purchase with the amount of output tax (tax on sales) and balance liability of tax (tax on sales minus tax on purchase) has to be paid to the government. This mechanism is called utilization of input tax credit.

For example- you are a manufacturer: 

1. Tax payable on output (final product) is Rs 450
2. Tax paid on input (purchases) is Rs 300
3. You can claim input credit of Rs 300 and deposit only Rs 150 in taxes 

Payment of Tax under GST

Once the tax liability is determined, the taxpayer must make the payment of GST by the 20th of the following month. Payments can be made through:

1. Electronic Credit Ledger

This ledger will serve as an electronic wallet. Where the Taxpayer needs to make any payment such as tax, interest, penalty etc and he does not have enough credit in his E-Credit Ledger, he will have to simply add money to the wallet and the money will be utilized to make the payment. 

This Ledger will basically reflect all the deposits made in cash using various modes. 

2. Electronic Cash Ledger

The input tax credit that is self assessed in the monthly returns will be reflected here under three categories i.e. IGST, CGST & SGST. The Tax Payer will be able to utilize the balance shown in this account only for payment of Tax as per the credit utilization rules and no other amount such as Interest, Penalty etc. 

a. Tax Payment for Different GST Components:

• CGST: Paid to the Central Government.
• SGST/UTGST: Paid to the respective State Government or Union Territory.
• IGST: Paid to the Central Government, with an apportionment to the State Government based on the place of supply.

Interest and Penalties

a. Interest on Late Payment:

• Delayed Payment of Tax: If GST is not paid within the prescribed time, interest is charged at the rate of 18% per annum.
• Excess ITC Claimed: If ITC is wrongly claimed and utilised, the interest rate is 24% per annum.

Interest is calculated from the due date of the payment to the actual date of payment.

b. Penalties:

Various penalties are imposed under GST law for non-compliance, which include:

1. Failure to Pay Tax: A general penalty of ₹10,000 or 10% of the tax due, whichever is higher, is imposed.
2. Non-filing of Returns: Penalty for non-filing of returns is ₹100 per day, subject to a maximum of ₹5,000.
3. Fraudulent Activities: If any fraud, misstatement, or suppression of facts is found, a penalty of 100% of the tax due may be levied, along with imprisonment in severe cases.
4. Failure to Issue Invoice: A penalty of ₹10,000 can be imposed for failure to issue invoices as per GST law.

Pre-Requisites to claim Input Tax Credit (ITC) 

The following conditions have to be met to be entitled to Input Tax Credit under the GST scheme: 

1. One must be a registered taxable person. 

2. One can claim Input Tax Credit only if the goods and services received is used for business purposes. 

3. Input Tax Credit can be claimed on exports/zero rated supplies and are taxable. 

4. For a registered taxable person, if the constitution changes due to merger, sale or transfer of business, then the Input Tax Credit which is unused shall be transferred to the merged, sold or transferred business. 

5. One can credit the Input Tax Credit in his Electronic Credit Ledger in a provisional manner on the common portal as prescribed in model GST law. 

6. Supporting documents – debit note, tax invoice, supplementary invoice, are needed to claim the Input Tax Credit. 

7. If there is an actual receipt of goods and services, an Input Tax Credit can be claimed. 

8. The Input Tax should be paid through Electronic Credit/Cash ledger. 

9. Person claiming the ITC has to furnish the returns. 

10. Full Credit on capital goods will be allowed in the year of purchase itself. 

Input Tax Credit Process 

Who can claim ITC?

ITC can be claimed by a person registered under GST only if he fulfils ALL the conditions as prescribed.

1. The dealer should be in possession of tax invoice
2. The said goods/services have been received
3. Returns have been filed.
4. The tax charged has been paid to the government by the supplier.
5. When goods are received in installments ITC can be claimed only when the last lot is received.
6. No ITC will be allowed if depreciation has been claimed on tax component of a capital good

A person registered under composition scheme in GST cannot claim ITC.

What can be claimed as ITC?

ITC can be claimed only for business purposes. ITC will not be available for goods or services exclusively used for: 

1. Personal use
2. Exempt supplies
3. Supplies for which ITC is specifically not available

How to claim ITC?

All regular taxpayers must report the amount of input tax credit (ITC) in their monthly GST returns of Form GSTR-3B. The table 4 requires the summary figure of eligible ITC, ineligible ITC and ITC reversed during the tax period.

The format of the Table 4 is given below:  

A taxpayer could have claimed any amount of provisional ITC until 9 October 2019. Later on, the government restricted the provisional ITC as below:

Applicable date	% of provisional ITC
Upto 09.10.2019	No limit
09.10.2019 to 31.12.2019	20%
01.01.2020 to 31.12.2020	10%
01.01.2021 to 31.12.2021	5%
From 01.01.2022 onwards	Nil

Accordingly, a taxpayer can claim ITC only if the same appears appears in their GSTR-2B. Hence, no provisional ITC can be claimed from 1st January 2022 onwards. Hence, matching of the purchase register with the GSTR-2B is crucial for ITC claims.

ITC Availment Timeline:

The time limit to claim input tax credit under GST can only be claimed before the due date of filing the GST return for September of the next financial year or the date of filing the annual return, whichever is earlier.

For example: If a registered person wants to claim an input tax credit for the financial year 2024-25. They must do so before filing the monthly return for September 2025 or filing the annual return for 2024-25, whichever is earlier. 

Input Tax Works Under GST 

Suppose Mr. A is a seller. He sells goods to Mr. B. The buyer Mr. B is now eligible to claim the purchase credit using his purchase invoices. 

This is how it works: 

1. A uploads all his tax invoices details as issued in GSTR-1. 
2. The details uploaded by Mr. A is automatically populated or reflected in GSTR-2A. This same data will get reflected when Mr. B files the GSTR-2 returns which are nothing but the details of his purchase. 
3. The details of the sale are then accepted and acknowledged for by Mr. B, and subsequently, the purchase tax is credited to Mr. B’s ‘Electronic Credit Ledger ‘ He can use this to adjust it later for future output tax liability and receive a refund.

Documents and forms required to claim Input Tax 

Credit Each applicant will require the following documents to claim Input Tax Credit under GST: 

1. Supplier’s Invoice:
   This is the invoice issued by a supplier for purchasing goods or services you made.
   
2. Bill of Supply:
   This document is issued in case of supplies that are exempt from GST. A supplier issued a bill of supply for goods and services or both as per the GST invoice rules.

1. Supplier’s Debit Note:
   The supplier of goods or services issues a supplier’s debit note. It is used to update the details or correct any errors. A debit note issued by the supplier to the recipient in case of tax payable or taxable value as specified in the invoice is less than the tax payable or taxable value on such supplies.
   
2. ISD Document:
   If the registered person has opted for  Input Service Distributor scheme, the credit notes and invoices provided by the ISD can be used to avail the ITC..
   
3. Bill of Entry:
   A Bill of Entry or similar document can be used for imported goods.

1. A credit note or invoice

It is to be issued by the ISD (Input Service Distributor) according to the GST invoice rules. 

1. An invoice issued like the bill of supply under certain situations instead of the tax invoice. If the amount is lesser than INR 200 or in conditions where the reverse charges are applicable according to the GST law. 

The above documents prepared as per the GST invoice rules should be furnished while filing the GSTR-2 form. Failure to present these forms can lead to either rejection or resubmission of the request. 

Input Tax Credit Utilisation

The utilisation of ITC follows a hierarchy to pay GST liabilities, ensuring that credit from different types of GST (CGST, SGST, IGST) is used in a specified manner. The sequence of utilisation is as follows:

1. Utilisation of IGST Credit:

• First, IGST credit is used to pay off IGST liability.
• Remaining IGST credit can be used for paying CGST and SGST/UTGST.

1. Utilisation of CGST Credit:

• CGST credit is used to pay CGST liability first.
• If there is any balance, it can be used for paying IGST liability.
• CGST cannot be used to pay SGST/UTGST liability.

1. Utilisation of SGST/UTGST Credit:

• SGST/UTGST credit is used to pay SGST/UTGST liability first.
• If there is any balance, it can be used to pay IGST liability.
• SGST/UTGST cannot be used to pay CGST liability.

Example: Suppose a taxpayer has the following liabilities and ITC balances:

• IGST liability: ₹10,000
• CGST liability: ₹5,000
• SGST liability: ₹5,000

Available ITC:

• IGST credit: ₹15,000
• CGST credit: ₹2,000
• SGST credit: ₹3,000

In this case:

• The ₹10,000 IGST liability will first be adjusted against IGST credit.
• The remaining ₹5,000 of IGST credit can then be used to pay the ₹5,000 CGST liability.
• No balance IGST credit remains to be utilised for SGST liability, so SGST credit will be used to pay SGST liability.

Input tax credit in respect of IGST, CGST, Cess and SGST/UTGST can be utilized in following sequences:

Input Tax Credit	Tax Credit Utilization Preference
IGST	IGST	CGST	SGST	X
CGST	CGST	IGST	X	X
SGST	SGST	IGST	X	X
Cess	X	X	X	Cess

Credit of CGST cannot be setoff with credit of SGST and vice versa. Credit of one state of SGST cannot be set off with SGST of another state. ITC of cess will be utilized for cess only. 

Claiming Input Tax Credit Against Inputs Sent for Job Work 

As a registered taxable person you can also claim ITC on inputs sent to gob-workers if the following conditions are satisfied: 

1. You should receive such input back within 1 year. 
2. If the inputs involved are capital goods, then you should get such inputs back within 3 years. 
3. If you fail to receive inputs within the above mentioned time period, then you will have to pay an amount equal to ITC claimed along with interest. 
4. However, you are still allowed to reclaim ITC if inputs or capital goods are received back from the place of business. 

Input Tax Credit on Supply of Capital Goods 

1. A registered taxable person is liable to pay tax on such a supply of capital goods on which ITC has already been claimed. 
2. This amount should be equal to ITC claimed after reducing it by prescribed percentage points or the tax applicable on the transaction value of such capital goods, whichever is higher. 

ITC Provided by Input Service Distributor (ISD) 

An input service distributor (ISD) can be the head office (mostly) or a branch office or registered office of the registered person under GST. ISD collects the input tax credit on all the purchases made and distribute it to all the recipients (branches) under different heads like CGST, SGST/UTGST, IGST or cess. 

ITC on Transfer of Business

This applies in cases of amalgamations/mergers/transfer of business. The transferor will have available ITC which will be passed to the transferee at the time of transfer of business.

Negative List for Input Tax Credit

ITC is Not Available to be Claimed in the Following Cases, u/s17 (5): 

Certain goods and services are not eligible for ITC, and these are referred to as the negative list. The key items in the negative list for ITC are:

1. Motor Vehicles and Conveyances: ITC is not allowed on motor vehicles unless they are used for transportation of goods, passengers, or for training purposes.
2. Food and Beverages: ITC is not allowed for food, beverages, and catering services unless the taxpayer is engaged in providing the same line of services.
3. Membership of Clubs, Health, and Fitness Centres: ITC is not available for expenses incurred on club memberships or fitness-related services.
4. Works Contracts: ITC is not available on works contracts for construction of immovable property unless it is used for further supply of works contracts.
5. Goods Used for Personal Consumption: Any goods or services that are used for personal consumption are excluded from ITC.
6. Construction Services: ITC is not available on goods or services used for the construction of immovable property (other than plant or machinery).
7. Telecommunication Towers and Pipelines: ITC on goods or services for the construction of telecommunication towers and pipelines is also not available.
8. Works Contract Services when supplied for construction of an immovable property,( other than plant & machinery) is not eligible ,except where it is an input service for further supply of works contract service 
9. If depreciation has been claimed on the cost of capital goods, then they are not eligible for Input Tax credit. 
10. Goods or services or both received by a non-resident taxable person are not eligible for input tax credit, except on goods imported by him; 
11. Goods or services or both used for personal consumption are not eligible for ITC; 
12. Goods Lost, stolen, destroyed, written off or disposed off by way of gift or free samples are not eligible for ITC; 

Special circumstances under which ITC is available: 

1. A person who has applied for registration within 30 days of becoming liable for registration is entitled to ITC of input tax in respect of goods held in stock (inputs as such and inputs contained in semi-finished or finished goods) on the day immediately preceding the date from which he becomes liable to pay tax.
2. A person who has taken voluntary registration under section 23(3) of the WBGST Act, 2017 is entitled to ITC of input tax in respect of goods held in stock (inputs as such and inputs contained in semi-finished or finished goods) on the day, immediately preceding the date of registration.
3. A person switching over to normal scheme from composition scheme under section 10 is entitled to ITC in respect of goods held in stock (inputs as such and inputs contained in semi-finished or finished goods) and capital goods on the day immediately preceding the date from which he becomes liable to pay tax as normal taxpayer. 
4. Where an exempt supply of goods or services or both become taxable, the person making such supplies shall be entitled to take ITC in respect of goods held in stock (inputs as such and inputs contained in semi-finished or finished goods) relatable to exempt supplies. He shall also be entitled to take credit on capital goods used exclusively for such exempt supply, subject to reductions for the earlier usage as prescribed in the rules.
5. ITC, in all the above cases, is to be availed within 1 year from the date of issue of invoice by the supplier. f. In case of change of constitution of a registered person on account of sale, merger, demerger etc., the unutilised ITC shall be allowed to be transferred to the transferee. 
6. A person switching over from composition scheme under section 10 to normal scheme or where a taxable supply become exempt, the ITC availed in respect of goods held in stock (inputs as such and inputs contained in semi-finished or finished goods) as well as capital goods will have to be paid (ITC reversal). 
7. In case of supply of capital goods or plant and machinery, on which ITC is taken, an amount equivalent to ITC availed minus the reduction as prescribed in rules (5% for every quarter or part thereof) shall have to be paid. In case the tax on transaction value of the supply is more, the same would have to be paid.

Input Tax Credit Reversal

Under certain circumstances, ITC that has already been claimed needs to be reversed. This can occur in the following situations:

1. Non-payment to Supplier within 180 Days:

If the taxpayer fails to pay the supplier within 180 days of receiving the goods or services, the ITC claimed must be reversed.

1. Change in Use of Goods or Services:

If goods or services that were originally intended for taxable supplies are used for exempt supplies or personal purposes, the ITC claimed earlier has to be reversed proportionately.

1. Capital Goods Sold Before Five Years:

When capital goods on which ITC was claimed are sold before five years, the ITC must be reversed based on the residual life of the asset.

1. Goods Lost, Stolen, or Destroyed:

ITC must be reversed if goods are lost, stolen, destroyed, written off, or disposed of as gifts or free samples.

1. Input Service Distributor (ISD) Incorrect Distribution:

If the ITC is incorrectly distributed by an ISD, it needs to be reversed.

Matching Mechanism for ITC Monitoring 

1. A matching mechanism has been developed to make sure there is no duplication in claiming ITC. 
2. It ensures that inward supplies returns filed by receiver matches outward supplies returns filed by supplier. 
3. Matching mechanism also helps in matching ITC claims with customs paid where goods are imported by registered taxable person. 
4. Any discrepancy which arises post verification is intimated to both parties so that they can make necessary corrections within the prescribed time frame. 

Although, ITC is a key to eliminate cascading effect of taxes. However, there are several conditions & restrictions to avail the credit for which there is a need to comply with the various documents and the other criteria required.